Why Choose CDs Instead of Reward Checking Accounts?

With some reward checking accounts paying 5%, it may seem like there's no reason to put any money into CDs which have rates much lower than 5%. There are still many nationwide reward checking accounts that pay around 4% APY. If you want a similar rate on a CD, you'll have to search hard and you'll have to settle for terms of at least 5 years.

For those with large balances, reward checking is problematic since most accounts cap the balance that qualifies for the top rate. However, even if you don't have a large balance, there is one issue to consider. There's no guarantee that reward checking rates will hold up. I hope they do, but as we've seen this year, rates have fallen.

Back in the second half of 2007 State Bank of Toledo was offering a nationwide reward checking account with a 6% APY with no balance cap. During that time, Pentagon Federal Credit Union came out with 6% long-term CDs. Some asked why lock your money into a CD when you could get the same rate in a liquid account. Two and a half years later, State Bank of Toledo's reward checking rate is down to 2.51% APY for balances up to $70K.

No one knows how rates will change in the future. Using CD ladders is a way to hedge your bets for both future high and low rates. So I'm not giving up on long-term CDs even in this current interest rate environment.

One other interesting note about 2007 is that this was the year that FNBO Direct came out with their 6% savings account special that lasted from May through September of 2007. After that promo, the rate fell to 5.05% APY. Like other savings accounts, the rates have fallen, and it's now at 1.40% APY which is about average for today's online savings accounts. So State Bank of Toledo's reward checking account has done well as a liquid account alternative to online savings accounts.

RCA's are just another gimmick these banks use to entice people to deposit money with them so they can use it and then find some infraction in the agreement so you will not be paid your "big" interest. I NEVER use a debit card. Banks and insurance companies are NOT to be trusted at all !

Yes, and corporations in general are evil too, right John? The fact that RCA's pay MUCH more than can be found in any CD more than outweighs the extra fine print one SHOULD pore through to find out exactly what is expected of you to gain this interest.

It's really not that difficult to properly use an RCA, and the vast majority of those who fail to receive the prime interest any given month is simply because of the customer's stupidity or laziness.

no-name , lots of thing are evil. Banks and insurance companies are among them - that is common knowledge. The rate paid by these rca's are not really that much of an advantage since they only pay that increased rate for minimal amounts usually not more than 25k. I guess I am one of the lazy who refuses to go through the hassle of debit cards when I have the cash in my pocket to pay for things 12 times in a billing cycle and not be one of those being "used" by their bank.

You could use a CD ladder instead of trying the scheme through maintaining a RCA. Yes, the rate is not guaranteed in the RCA. The thing that is the advantage in the RCA is that it is immediately liquid. Most CDs will sock you with an early withdrawal penalty should you need to take it all out before maturity (for example, you found the perfect home and need a large down payment right now). I personally don't want to bother having to keep with the RCA requirements even if it will give me a little more money every month. I have enough stuff that I have to remind myself to keep track of every month anyway and I don't need yet another "nagging" thing to add to that list.

I must admit I've been pondering RCAs for my after-tax stuff not already in short-term CDs, or for maturing CDs, but the "requirements" are daunting, and the rewards (pun intended) minimal. First, I can get 2% in Alliant's garden-variety savings account while I wait for a reasonably good two year CD to pop up. Second, for $100,000 (the average after-tax stuff I keep in Alliant savings), a 3% RCA would mean an "extra" $1000, but also: (a) four RCAs with $25K caps; (b) four direct deposits in addition to the one I currently have for Social Security; and (c) forty debit transactions requiring a signature (I think that means in excess of $25).

Even if I could find four RCAs here in California I'd qualify for at or around 3%, I doubt I could meet (b) and (c).

If I could find one RCA with a $100K cap like the other poster, that might work, but I don't recall any available to me here in Northern California. If I'm wrong on that, please let me know, since I'm open to the RCA concept if it's simple and practical.

All of the RCA's I've ever had, and I've had quite a few, have accepted ACH deposits/transfers from external accounts for meeting that requirement (even though the RCA banks seem to often use the term "direct deposit and/or direct debit."

I've yet to have a RCA of mine that required an actual direct deposit of a paycheck or pension check or something like that.

Most of those I have have the 10 debit card uses per month plus usually one ACH in or out, along with accepting electronic statements, which I prefer anyway.

I used to withdraw cash from the ATMs and use that to pay for my everyday expenses...groceries, gas, food out, etc etc... Now I rarely withdraw cash, and just use my RCA cards for all those mostly small routine expenses.

For most people, doing those kind of things via RCA is going to probably meet the requirements for at least two RCAs per month.

For me, I keep the long-term cash I don't expect to need or use in 5-8 year CDs in laddered fashion... Hopefully by the time they begin to mature in a few years, rates will have rebounded some.

But I also keep a fair size amount of ready cash available, since I'm thinking about buying a condo sometime in the near future. For that money, I'm keeping it in 2 or 3 RCAs and have been earning 4-5% APY... Yet to miss qualifying in any month yet over the past two years.

RCA can be a dangerous place if you keep substantial amount of money.Imagine driving around town with a debit card line of credit of $25K, $50K or even $100K, If you lose it or a rouge merchant keeps a copy of your card, he can sell it to the underground for profit and you could lose your shirt. Never mind the banks assurance that your loses will be minimal, it could take months of investigation and you will not have access to your money during that time. The account will be frozen and even FBI may be involved. They will assume you are the guilty party unless proven otherwise. That is the biggest turn off for me.

I agree with the poster above me.I also have reservation to carry a debit card with all those money attached to it. It is scary if you lose it or a double swipe at the restaurant. Disputing a charge is a nightmare and the bank will charge $25 to cancel $1 unauthorized charge.I have a RCA but only for day to day activity with around $1000 in it.

My problem with RCAs is that they get the money for the high interest rate from charging the merchant higher fees than a debit transaction, or especially cash. It seems that most of the transactions that people do for RCAs are small and at local physical stores locations. So it's like you're getting a discount from that store, since your interest money is coming from there. It can also cause the store to raise prices to cover the transaction fees more people are incurring.

If you make that many credit card transactions, you might as well make some money from the bank.

I think it's pretty rotten that banks convince people to cost the merchant more fees my using the credit option instead of debit or cash.

As time goes on, more and more POS credit/debit machines at stores ask you for your pin first and make it a little confusing to use your bank card as credit instead of debit.

Thanks all for your comments and suggestions. I guess the first order of business is to find three or four financial institutions for which I meet the eligibility requirements and which have that 3% (or thereabouts) RCA rate. Then it's just a matter of figuring out if I could or would ever meet the debit card transaction requirements. That may be a stretch, even if relatively modest purchases count.

The idea of using ACH transfers hadn't occurred to me. I guess the issue there would be how much per month I'd have to transfer, and how much I'd have to keep in reserve at Alliant to cover the transfers.

It does get a tad complicated, but you've given me an interesting homework assignment.

Most of the RCA accounts count "debit" or pin transactions. Only a very, very few make you select the credit option to qualify.

As far as a direct deposit goes, I meet the requirement with as little as a $5.00 ACH push in, so no need to worry about a big dollar direct deposit.

As far as the people that worry about getting cards stolen...why not only carry the one you are using? Why not only use it where you are the only person swiping the card? Don't use it at a restaurant where someone can copy it.

My debit cards (and most peoples) have fairly small daily spending limits...500-600 dollars. Nobody is going to be able to clean you out unless your alsleep for a month.

I'm beginning to think some of you guys purposely try to spread misinformation.

To the heroic guy above me, true $500 per day on cash withdrawals at ATM, but add the purchases allowed at $1500 per day and cash advances at POS purchases and multiply those amounts for few days of activities and you will never recoup your money from the bank. How you will prove that someone else did it instead of you?

To poster at 11:29 AM, December 22, 2009.I carry 11 credit and debit cards in my wallet. One of my cards fell off while paying at a supermarket.I never found out until I wanted to use my card 4 days later.I retraced all my purchases and found it at the supermarket manager's office. They never called the bank nor ever tried to find me. If someone else found it and used it for four days, I would have never known about it.I don't believe your statement that people are spreading misinformation about the debit cards. It is a real concern of mine and I believe everyone else with sound mind should worry about such things.

The Anonymous at 11:29 AM, December 22, 2009 said he only carries one card, I don't believe it a single bit, unless he is a teenager and on allowance from his parents. Most of the people carry at least 3 debit or credit cards as per FTC survey done last year.As for the misinformation claim goes,GET REAL, you are spreading the misinformation, not the other way around.

I agree with Anonymous, at 5:39 PM, December 22, 2009.Also, would like to add that if you are overdrawn using debit card, will cost you $29-30 for each purchase that is below or negative on your balance account connected to that debit card. There is no such risk with regular credit card.

To portect it, one should avoid using PIN-based transactions (no-pin usage has the same MC protection and has zero liability). One can reduce or close the daily limit. I have tried a few banks, they all claimed that is is a universal limit and reluctant to change for my case. Indeed, one has to guard the RCA debit cards extra-carefully. Beyond two-day notices, you may lose $500 for fraudulant debit usage.

Anothe RCA issue is the liability for fradulant transfers, you have to informt the bank within 60 days (from your statement). Beyond 60 days, you may lose all the money plus the over-draft. So frequent online check of RCAs is also absolutely essential.

Finally, RCA is so new that banks have their own rules to handle these cases. It may be up to the mercy of the banks if anything fraudulant happens to your RCA accounts. Not like BofA accounts or checking accounts of some typical banks, that you are rest assured if anything strange happens.

Nevertheless, I still think RCA is much more worhtwhile than CDs; rate-wise and liquid-wise. One jsut need to be very very careful with the associated debit card as well as account status.

I'm convinced, debit cards and rewards checking accounts are evil. I fear for my life whenever I leave my house, and pick pockets and theives run amok in my small midwestern town. Like many of the posters here, I am highly accustomed to cowering in the fetal position, and nowhere near responsible enough to keep track of my cards.

From now on my purchases will only be conducted using gold, or chickens.